An E&E Special Report

KEYSTONE XL

Pipeline could pose challenge to Venezuela's new leadership

Blake Sobczak, E&E reporter

EnergyWire: Monday, March 11, 2013

While Venezuela's new leaders will likely continue to demonize the United States, following in the footsteps of the late president Hugo Chávez, the South American country's real danger could come from an unusual place: Canada.

The threat comes from heavy Canadian crude oil, which is similar to Venezuelan crude. And if TransCanada Corp.'s Keystone XL pipeline gets approved, it could test the next regime in Caracas as U.S. refiners eye alternatives to Venezuelan crude.

"There isn't enough capacity to refine both the Canadian oil and the Venezuelan oil," said professor Erick Langer, director of the Center for Latin American Studies at Georgetown University and an expert on Venezuelan politics. "So if the pipeline is built, then Venezuela might be up a creek without a paddle, because they won't have anywhere else to refine the oil."

Venezuela, one of the founding members of the Organization of the Petroleum Exporting Countries, has been buffered from the impact of the domestic shale oil boom in the United States because of its proximity and its huge supplies of heavy crude. Many U.S. Gulf Coast refineries are tailored for processing "heavy" oil, which has a higher density and sulfur content than most domestically produced varieties and is often brought in from Mexico or Venezuela.

Canada's vast oil sands also contain heavy oil. The proposed Keystone XL pipeline would pump 830,000 barrels per day of the gooey bitumen from Alberta to the U.S. Gulf Coast, giving refiners such as Valero Energy Corp. an attractive alternative to Venezuelan crude.

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"Valero is already reducing the amount of heavy crude brought in from South America and Mexico," said spokesman Bill Day. "It's already been declining, and that will continue and accelerate once Keystone is operational."

Valero's overall refining capacity is about 3 million barrels per day, although Day declined to offer specific figures regarding the various sources of the company's oil.

Day cited price concerns and declining production in parts of Latin America, "whether it's because of dysfunction in Venezuela's oil production or because of the maturity of the fields," he explained.

"That's why Valero's looking for additional sources of heavy crude, and there are vast supplies of relatively low-cost crude oil in Canada," he said.

If too many U.S. refiners move to Canadian crude, it could jeopardize a key pillar of Venezuela's economy. Such a switch could also affect the political clout of Chávez's likely successor, interim President and former Vice President Nicolás Maduro. Chávez died of complications from cancer last week after more than 14 years in power.

"Maduro does not have the charisma Chávez had," Langer said. "He cannot afford to stop the social programs that came under Chávez, so he will probably have to undergird his own political ambitions with more money."

If the United States were to back away from Venezuelan crude, Langer said, the South American nation would find itself in a difficult position. Unable to afford upgrading its own refining capacity, Venezuela would have to ship its crude halfway across the world -- a prospect that "makes no sense at all," Langer said.

Missed potential

Venezuela relies on oil revenues for roughly 45 percent of its federal budget, according to the CIA World Factbook. The South American nation has long exported its heaviest crude to facilities in Texas or Louisiana, just a quick jaunt away by barge across the Gulf of Mexico.

Chávez was often criticized for failing to recognize the significance of U.S.-bound crude exports to his country's economy. Average daily U.S. imports of Venezuelan crude peaked at 1.394 million barrels per day in 1997, the year before the elections that catapulted Chávez into the presidency. Since then, U.S. imports have dropped 35 percent to 906,000 barrels per day in 2012, according to figures from the U.S. Energy Information Administration.

"One of the biggest mistakes Chávez made was to make Venezuela irrelevant to the U.S. oil supply equation," said Pedro Burelli, corporate finance and strategy consultant and a former member of the executive board of Petróleos de Venezuela SA, the country's state-run oil company. "This is astonishing given the dependence of his government on income from sales of oil to the U.S."

Burelli accused Chávez of wielding his nation's oil wealth as a "weapon" while pursuing his personality-driven, peculiar brand of socialism.

"Chávez forced the U.S. government and other interested parties to begin planning and looking for alternatives," Burelli said. "Keystone is just one of them, and once built, one assumes it will be used to capacity."

Venezuela is still the largest oil exporter in the Western Hemisphere, shipping off roughly 1.7 million barrels per day. While still a significant amount, that number represents a fraction of the country's potential (EnergyWire, March 7). Venezuela boasts one of the world's largest proven reserves of oil -- more than 236 billion barrels, second only to Saudi Arabia for conventional fields.

Venezuela's state-owned oil giant PDVSA did not respond to requests for comment.

Burelli thinks his home country's daily oil output should be around 6 million barrels, particularly if it had followed through with the Apertura Petrolera plan of the late 1990s. That policy would have opened the petroleum industry to more foreign investment, but it was overturned when Chávez came to power. Now Venezuela produces roughly 2.7 million barrels per day in what Burelli considers a testament to Chávez's mismanagement of the oil sector.

As Venezuela gears up for a special presidential election to replace Chávez, the debate rages on over the proposed Keystone XL pipeline in the United States (Greenwire, March 4). A recent U.S. State Department draft assessment of the line concluded it would not have a "substantial impact" on oil sands development or climate change. Environmentalists have cried foul, questioning the validity of the report and vowing to continue opposing the project. They say the Keystone XL line would accelerate global warming and generate air and water pollution.

President Obama has said he will make the final decision about the Keystone project, although his verdict may not come until this summer at the earliest.

Meanwhile, Keystone's owner TransCanada continues to tout the line's benefits to U.S. job growth, as well as the stability afforded by 18-to-20-year contracts with refiners.

"Projects like Keystone XL are long-term in nature, and no one knows what may happen in the Middle East, Venezuela, Nigeria or other regions where the U.S. currently imports oil from," said TransCanada spokesman Shawn Howard. "The reality is that regardless of these developments in Venezuela, the case for Keystone XL remains strong."